Question 1

The Bretton Woods system was the major system of exchange rate determination between World War I and World War II.

Accepted Answer

The Bretton Woods system was established in 1944, after World War II.

Question 2

Related to the Economics in Practice on p.705: The European Central bank has experienced difficulties during the financial crisis of 2008-2009 because countries using the euro have begun to set their own euro exchange rates.

Accepted Answer

Countries using the euro do not have the ability to set their own exchange rates, as the euro is a single currency used by all member countries of the eurozone. The ECB's difficulties during the financial crisis were primarily related to issues such as high levels of government debt and slow economic growth in some member countries, as well as disagreements among eurozone policymakers over the appropriate response to these challenges.

Question 3

Purchasing power parity theory holds that exchange rates are set so that the price of similar goods in different countries reflects the relative interest rates in those countries.

Accepted Answer

Purchasing power parity theory holds that exchange rates are set so that the price of similar goods in different countries reflects their true value, which could be influenced by a variety of factors such as inflation, supply and demand, and economic growth, among others. Interest rates may be just one of many factors affecting exchange rates.

Question 4

Under the gold standard,no gold would enter or leave the country if

Accepted Answer

Under the gold standard, a country's overall balance of payments had to remain in balance in order to maintain the fixed exchange rate system. If a country had a surplus, it would receive gold from other countries, whereas if it had a deficit, it would need to pay out gold to settle its obligations. This would cause a decrease in the country's gold reserves and ultimately lead to a contraction of its money supply. Therefore, it was essential for countries to balance their payments under the gold standard.

Question 5

The gold standard was the major system of exchange rate determination before 1914.

Accepted Answer

The gold standard was the dominant international monetary system from the late 19th century until the outbreak of World War I in 1914. Under the gold standard, currencies were directly convertible into gold, and the exchange rate between any two currencies was determined by their relative gold values.

Question 6

Under the gold standard,gold would leave the country if the country's overall balance of payments was in surplus.

Accepted Answer

Under the gold standard, gold would typically flow into a country with a balance of payments surplus, as it would be receiving more money from exports than it was spending on imports, leading to an inflow of gold to settle the difference.

Question 7

The law of one price states that if the costs of transportation are small,then the price of the same good in different countries should be roughly the same.

Accepted Answer

The law of one price states that if there are no transportation or transaction costs involved, the price of the same good in different countries should be roughly the same. This is based on the principle of arbitrage, where traders would buy a good in one country and sell it in another to take advantage of price differences, ultimately leading to equalization of prices.

Question 8

A "managed floating" system of exchange rate determination

Accepted Answer

The "managed floating" system, also known as a "dirty float," has been the primary system for determining exchange rates since 1971, following the collapse of the Bretton Woods system. This system allows currencies to float in value in the foreign exchange market but permits governments to intervene to stabilize their currency's value when necessary.

Question 9

Related to the Economics in Practice on p.705: Countries that use a common currency like the euro do not have the ability to

Accepted Answer

Countries using a common currency cannot conduct independent monetary policy because they share a central bank and monetary policy decisions are made collectively.

Question 10

Expansionary monetary policy causes the exchange rate to depreciate.

Accepted Answer

When a central bank implements an expansionary monetary policy, it increases the money supply and reduces interest rates. This makes the domestic currency less attractive to investors, causing them to shift their funds to foreign currencies with higher interest rates, leading to a depreciation of the exchange rate.

Question 11

The effect of a sustained increase in government spending or investment on aggregate output is larger in an open economy than in a closed economy.

Accepted Answer

In an open economy, a portion of the increased spending leaks out through imports, reducing the multiplier effect on aggregate output compared to a closed economy where all spending circulates within the economy, amplifying its impact.

Question 12

The Bretton Woods system was the major system of exchange rate determination

Accepted Answer

The Bretton Woods system was established in 1944 at the end of World War II and lasted until 1971 when it collapsed due to the United States' decision to end the convertibility of the dollar into gold.

Question 13

The International Monetary Fund (IMF)was created as a part of the

Accepted Answer

The IMF was created as a part of the Bretton Woods agreement in 1944. The agreement established the dollar as the world reserve currency and created a system of fixed exchange rates that lasted until 1971. The IMF was established to oversee the system and provide financial assistance to member countries.

Question 14

Since 1971,the world's exchange rate system can be described as a "freely floating" system.

Accepted Answer

Since 1971, the world has primarily used a managed floating exchange rate system, where currencies fluctuate in value against each other, but governments or central banks may intervene to stabilize or influence their currencies' values.

Question 15

Monetary policy is more effective when the exchange rate is flexible and the economy is open.

Accepted Answer

When the exchange rate is flexible, it allows for adjustment in response to changes in monetary policy. An open economy allows for more trade and capital flows, making monetary policy more effective in affecting exchange rates and other macroeconomic variables.

Question 16

The gold standard was the major system of exchange rate determination

Accepted Answer

The gold standard was the major system of exchange rate determination before 1914. It was a monetary system in which the value of a country's currency was directly linked to the amount of gold it held. This system collapsed during World War I and was replaced by the Bretton Woods System (C), which lasted until 1971. Therefore, options A and D are incorrect.

Question 17

Under the gold standard,if gold was flowing from the U.S.to Great Britain,the U.S.would experience all of the following EXCEPT

Accepted Answer

When gold flows out of a country under the gold standard, it reduces the country's money supply, leading to lower aggregate demand, higher interest rates, and falling income. However, higher prices are not typically associated with gold outflows under the gold standard. Instead, a decrease in the money supply tends to lead to deflation.

Question 18

Under the Bretton Woods system,countries experiencing large and persistent current account deficits were obliged to

Accepted Answer

Under the Bretton Woods system, countries experiencing large and persistent current account deficits were obliged to devalue their currencies to improve their competitiveness in international trade and encourage exports.

Question 19

Under the Bretton Woods system,currencies were fixed in terms of the U.S.dollar.

Accepted Answer

Under the Bretton Woods system, which was in place from 1944 to 1971, currencies were fixed to the U.S. dollar at a predetermined exchange rate, and the U.S. dollar was in turn fixed to gold at a rate of $35 per ounce.

Question 20

Fiscal policy is more effective when the exchange rate is flexible and the economy is open.

Accepted Answer

Fiscal policy tends to be more effective in a closed economy or when the exchange rate is fixed because the impact of government spending or taxation is less likely to be diluted through changes in net exports or exchange rates. In an open economy with a flexible exchange rate, fiscal expansion can lead to currency appreciation, which can reduce net exports and offset the fiscal stimulus.

Quiz 20: Open-Economy Macroeconomics: the Balance of Payments and Exchange Rates